Experts consider microfinancing as a sustainable way to alleviate poverty through the help of community transformations and entrepreneur empowerment and financial tool literacy. Microfinance has started getting more attention from large investment bankers as well as lenders because the growing market of small businesses plus the increasing number of creditworthy borrowers has largely contributed to the success of this industry.
How does microfinancing work?
Microfinance refers to a broad range of financial solutions such as micro-saving, micro-loans, and micro-insurance. It was introduced back in 1970 as a way to enable poor people to start their businesses. Thanks to its improvement plus the changing market, it has become a promising industry in recent years. Investors are availing of microfinancing investments because of the potentially high returns and a large market. For example, it can cater to a trust group of SMEs.
Each SME owner in the group co-guarantees the loans applied for, so the lender won’t require collateral. If for any reason, the member who asked for the loan cannot pay for his or her loan, the other members pay the contribution.
Why is it important?
SMEs largely contribute to the growth of the global economy. Microfinance is observed through the numbers of jobs and the amount of income generated by SMEs. In many countries worldwide, about 60% to 70% of employment is from the small and medium enterprise sector. The relatively high rate is primarily attributed to the fact that many big companies downsize their operations by outsourcing people.
Microfinance on a global level is also mostly seen in the wholesale and trade industry, communication services, hotel and restaurants, and construction businesses. In recent years, it has also been seen as a major contributor to the IT industry. While microfinancing is mostly designed for small and local enterprises, its reach extends to the global market.
If you are an investor, microfinance affects you through the returns generated from related forms of investment. Both local and international banks have started integrating microfinance investments in their respective portfolios. If you work in the finance industry, you will certainly be urged to upgrade your skills and learn how to use new financial tools that are used in the microfinance business. Thanks to its growing success, microfinancing has also opened many doors to job seekers.
Can microfinancing pave the way to sustainable development?
Thanks to the constant improvement of this industry it has encouraged more trust groups plus entrepreneurs to grow their businesses using microfinancing solutions. However, most experts note that a detailed and effective strategy should be formulated by the government in order to inform and reach small business players. Hopefully, in the next few years, it continues to grow and improve so it can reach more SMEs, especially in the international market.
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